Agenda item

To receive the 2021/2022 Audit Results Report (report of EY enclosed).

Consideration was given to the South Holland District Council Audit Results Reports for the year ended 31 March 2022, produced by Ernst Young.

The Partner (EY) provided the following overview:

• the report provided a positive position in that the audit was almost completed with very few matters to report;
• the status of a number of areas would be discussed, with one item of significance;
• the materiality level being worked to was £1.2million – any significant matters above this amount would impact on the ability to issue an unqualified audit opinion, and any audit differences above £60,000 would be reported;
• page 5 of the report detailed the work outstanding on the date that the report was issued but the following progress had been made during the intervening period:
  • creditors existence testing audit had been completed with no issues reported;
  • infrastructure assets had been completed with no issues reported; compliance with the updated Code was being practiced;
  • a response for COVID-19 grant testing had been received;
  • journals testing had been completed with no issues reported;
  • Going Concern was awaiting management assessment;
  • the payroll audit had been completed with no issues; and
  • an additional issue in respect of Group Reporting had been raised.
• an executive summary of audit differences was outlined on page 7 of the report, with detailed information at page 29.
  • the Partner (EY) stated that the Committee needed to consider the ‘summary of unadjusted differences’ as outlined on page 29 of the report, regarding the PSPS element of the Local Government Pension Scheme. The Committee needed to agree with the management view of non-adjustment and to state the basis of the decision.
    • Members were comfortable if the issue did not affect the audit opinion and the Partner (EY) confirmed that the audit opinion would not be affected.

• The Partner (EY) reiterated that the audit report was positive. Only one issue needed to be resolved regarding a difference of opinion for ‘valuation of dwellings’ as at 31 March 2022 which had resulted from the following data point differentials considered by EY and SHDC:
  • EY had undertaken three data point checks (52 dwellings from each of the largest beacon groups compared to Zoopla/Rightmove prices, Land Registry house prices in South Holland, and analysis of Right to Buy properties sold in 2021/22). These gave expected increases in valuations for the 2021/22 dwellings of between 10.9 per cent and 18 per cent; 

o   SHDC’s valuers had applied a 6 per cent increase, which equated to a potential understatement of between £9m and £28m.

§  The Deputy Chief Finance Officer (PSPS) responded that SHDC considered their valuers as ‘market experts’ and that the following factors had been taken into account when arriving at the 6 per cent increase:

o   beacons;

o   sold prices and percentage increases;

o   market and economical data;

o   stamp duty changes and the impact on the market;

o   discussions with local agents;

o   news articles; and

o   a review process undertaken by SHDC valuers prior to the agreement of the increase had considered:

§  that a single figure applied to a portfolio of 3,800 dwellings would cause variances, both positive and negative;

§  that Covid marked an unprecedented period which had affected the market; and

§  when considering ‘sold’ prices for Right To Buys, it could be considered that only the most desirable properties of higher value were sold and in this respect the use of the two valuation approaches would reveal discrepancies with the values of the less appealing properties within those beacons being the most affected.

·       The Partner (EY) responded that Ernst Young had received sight of SHDC’s valuation report and had asked questions of the valuer but had not yet gained sufficient assurance that the data point utilised, and therefore the assumptions, were accurate. The narrowest range of difference was £9million, with a materiality level of £1million, and therefore the issue remained a source of ongoing discussion. The options were as follows:

o   for SHDC valuers and management to provide evidence which supported the 6 per cent increase, and for EY to be satisfied with the evidence to enable assurance to be given on that basis;

o   for SHDC’s amended valuations to concur with EY’s expected increases of 10.9 per cent to 18 per cent; or

o   that no amendment be made, and the audit opinion would be qualified on the difference of opinion.

A further meeting with the valuers and auditors was arranged for 24 March 2023 after which time it was agreed that an update be provided to the Chairman of the Governance and Audit Committee.

·       The Partner (EY) gave the following verbal update regarding a Group accounts’ issue, which was discovered after the report had been published:

o   as Boston Borough Council had become an additional shareholder from 1 April 2021, this needed to be represented within the accounting requirements and required a change from a Joint structure to a Group structure. The Deputy Chief Finance Officer (PSPS) was in the process of working through the amendments in order to re-present the Group accounts.

Members considered the report from EY and responses from officers and made the following comments:

• Members asked how long SHDC had used the current valuer for dwellings and whether any previous difference of opinion had occurred.
  • The Deputy Chief Finance Officer (PSPS) responded that the current valuers had been used for seven years. Previous valuations had highlighted some areas beyond tolerances, but these had not been material.

·       Members recognised the implementation of a new General Ledger (GL) System as a substantial achievement.

·       Members referred to the inherent risk National Non-Domestic Rates Appeals Provision, as set out on page 19 of the report, and assumed that the value of provisions for appeal would have decreased due to the removal of certain challenges.

·       Members asked for clarification of point 3 on page 29 of the report regarding ‘Adjusted Audit Differences’ in respect of the Council’s gain in fair value for Welland Homes and South Holland Homes.

o   The Partner (EY) responded that this element was not a financial instrument and therefore has been reclassified as Other Comprehensive Income; and

o   The Deputy Chief Finance Officer (PSPS) confirmed that EY’s suggested approach had been clarified with Link Asset Services and would be followed.

·       Members referred to ‘Other Reporting Issues’ on page 35 of the report, and asked why the Council had not completed the 2021/22 CIPFA Disclosure Checklist at the time of drafting the statement of accounts.

o   The Deputy Chief Finance Officer (PSPS) responded that capacity was limited for the current year. The Audit Manager confirmed that retrospective completion of the checklist for 2021/22 was not required however the checklist would need to be completed for the following year alongside the production of the accounts.

AGREED:

That the Audit Report 2021/22 be received by the Governance and Audit Committee.